Extent of SG non-payment

The extent of SG non-payment

3.1
It became apparent during this inquiry that due to various data gaps, it
is difficult to precisely estimate the extent of non-payment of SG in Australia.[1]
This issue and its ramifications are discussed in this chapter.

Industry Super Australia's estimate

3.2
According to Industry Super Australia's (ISA) submission, the report
'Overdue: Time for action in unpaid super' released by ISA and Cbus in December
2016, Australian employers failed to pay at least $3.6 billion in SG
contributions in 2013-14.[2]

3.3
The two components of this combined estimate are:

underpayment of SG for Pay As You Go (PAYG) employees and sham
contractors[3],
which ISA estimates as at least $2.8 billion in 2013-14; and

unpaid superannuation for workers employed in the cash economy,
which research by Tria Investment Partners (Tria) for Cbus estimates added a
further $800 million to the total amount of unpaid superannuation.[4]

3.4
The report noted that this estimate equated to 30 per cent of employees
(approximately 2.4 million individuals) not being paid part or all of their
compulsory superannuation. The report also stated that on average, affected
employees missed out on approximately $1500 (or approximately four months of
SG) of superannuation contributions.[5]

3.5
The following table is based on the submission and summarises the
report's findings.

3.6
In a supplementary submission dated March 2017, ISA provided the
committee with a revised estimate of the extent of SG non-payment, putting the
2013‑14 figure at $5.6 billion. The supplementary submission noted:

Our December [2016] report projected that 2.4 million
Australians are being underpaid by a conservative estimate of at least $3.6
billion. We have revised our research, removing estimates for the black economy
used in December, and using only ATO tax file data for 2013-14. Our revised
projections show that 2.76 million people were affected in that financial year
by an average amount of $2,025 per person, or an aggregate amount of $5.6
billion.[7]

3.7
The supplementary submission went on to provide further detail on the
predicted cumulative impact on retirement savings:

Using only official ATO data, ISA estimates the SG gap is
$5.6 billion per year; $5.45 billion of this is for people aged 20–64 years of
age. ISA estimates that 2.69 million [people] aged 20–64 are underpaid. If this
continues to occur in the workforce each year from 2013-14 to 2023-24, ISA
projects the cumulative impact on retirement savings would be
$102 billion. Table 8 shows this projection, which assumes wage growth
consistent with the forward estimates, ABS projected growth, the scheduled rise
in the SG rate and 5 per cent returns.

Table 8 – Growth in the Impact on Savings over a Decade

Year ending June

Cumulative gap

2014

$5.59 billion

2015

$11.84 billion

2016

$18.62 billion

2017

$25.98 billion

2018

$33.98 billion

2019

$42.68 billion

2020

$52.16 billion

2021

$62.45 billion

2022

$74.09 billion

2023

$87.21 billion

2024

$101.95 billion

Source: ISA projections based on wage growth consistent
with the forward estimates, ABS projected population growth, the scheduled rise
in the SG rate and 5 per cent returns.

A shortfall in retirement savings of over $5 billion per year
will have a significant impact on retirement incomes...a single year's
underpayment is associated with a lower balance of $23,860 for 60-64 year olds,
but we do not have direct information on historical underpayment. In the
absence of longitudinal data, it might be useful to note that a balance
difference of $23,860 would imply $1,200 less per year in an allocated pension
payment and $388 per year more in age pension (if assessed at the higher income
test deeming rate of 3.25 per cent).[8]

3.8
ISA also explained the revised modelling to the committee:

The estimates in our December report combined ISA estimates
of underpayment (but not nil payment), in the SG population with estimates
produced by Tria Investment Partners (for Cbus) of the black economy where
workers were not receiving SG at all. These combined estimates are
conservative. Addressing the Terms of Reference of the current inquiry requires
the detail of a single unit record source of data.

Accordingly, ISA has revised its estimates to include people
not paid any SG even though they are in the SG population (operationally
defined as wage and salary earners aged 20 or more, earning about $5,400 in
wages, not having a partnership or trust income and not satisfying the ten per
cent income test rule).

In our revised research, removing estimates for the black
economy used in December, and using only ATO tax file data for 2013-14, we find
there are more people underpaid SG and a significantly higher dollar gap...

ISA has modelled these projections using the ATO 'matched
data' 2 per cent sample file of personal tax and MCS [member contribution statement]
data sets. The ATO could further refine ISA projections by using the complete
'matched data' file, adjusting OTE [ordinary time earnings] on a more granular
level by industry sector, income, gender and age, adding Division 293 tax data
[tax arrangements for high income earners] and removing defined benefit cases
from the eligible SG population.[9]

3.9
The committee asked the ANAO whether it had any comments on the ISA
methodology. Ms Isabelle Favre, Senior Director at the ANAO noted:

I am not an economist, so I will be very careful. It seems
to be a very thorough and cautious methodology. The estimates put forward are
systematically the most conservative of the different methodologies that they
have used. Given that an estimate is just that – an estimate – and it is meant
to help direct a compliance strategy for the ATO, for instance, and we know it
is an estimate, there is a risk that the estimate is not correct. But it still
seemed to be good enough to be used for directing a compliance strategy.[10]

3.10
Mr Andrew Morris, an Executive Director at the ANAO further clarified:

While we would not comment on the particular methodology, it
would complement well the top down approach. The ATO has the top-down approach
for the SG gap and it would also be useful for that more bottom-up approach to
be able to identify the number of employees, say, or employers that are not
compliant. If it is also able to target some of the industries and sectors – if
it goes that far, that would complement the gap analysis.[11]

ATO response to ISA estimate

3.11
The ATO responded to the December 2016 estimate of the SG non-payment,
asserting that the ISA figure 'substantially overstates' the prevalence of SG
underpayments.[12]

3.12
The ATO noted that the modelling used by ISA, while valid, is different
to the proposed ATO approach to estimating the SG gap, as the ATO approach is a
'top down approach' which does not seek to estimate the number of employees
underpaid.[13]

3.13
The ATO submission explains:

We do not consider the number of people identified with an amount
of SG underpayment in the ISA report to be reliable as the report uses
'averages' to reach a specific estimate, rather than an estimate expressed
within a 'range'.

The ATO considers that the 'tolerance threshold'; used to
determine the 2.15 million people reported with an apparent SG
underpayment in the report is too high. The report used a tolerance threshold
of 8.5 per cent across the entire population.

A 'tolerance threshold' is an adjustment to the rate of
superannuation on the salary or wage figure to account for the fact that salary
or wages reported may exceed ordinary time earnings (OTE) (because of aspects
such as overtime, allowance, etc.).

We therefore believe the adjustments for OTE used in the
report are insufficient to account for the difference seen with employment
models and work practices across various broad industries.[14]

Lack of alternative SG gap figure
from the ATO

3.14
Although criticising the ISA estimated extent of the SG gap, the ATO was
unable to provide the committee with an alternative figure.

3.15
The ATO informed the committee that although work is currently being
undertaken on the matter, the task is a challenging one and the agency is yet
to establish a reliable estimate, noting 'while the methodology is considered
to be sound there is in a statistical sense a low level of confidence'.[15]

3.16
The committee queried the ATO on its apparent reluctance to engage in
and prioritise the issue of establishing an accurate estimate of the SG gap,
particularly given that previous reviews, dating back to 2010, included
recommendations that this be the case.[16]

3.17
Mr James O'Halloran, the ATO Deputy Commissioner responsible for
Superannuation, responded by reiterating that the ATO had made a commitment to
estimate gaps for all taxes and programs administered by the ATO. He stated:

I am not sure I would characterise it as resistance... There is
a public commitment from the Commissioner, particularly to the Tax and Revenue
Committee, to undertake and progress a tax gap program... I would perhaps suggest
that the ATO is in fact progressing a full program of gaps, and at this stage
we are working through those, and that includes the SG gap.[17]

3.18
Mr O'Halloran further noted:

In relation to the SG gap, effectively most of last year, as
certainly many stakeholders knew, we have been progressing to develop a
credible and reliable methodology to determine the SG gap. We certainly had
been working through an appropriate methodology, but at this stage, as is I
think on the public record, we do not feel we have a reliable one, that we have
a high enough level of confidence. We have been taking particular advice from
an ATO panel of experts which has Professor Neil Warren, Chris Richardson and
Richard Highfield on it... Certainly we feel that, before we are comfortable that
it is a reliable and credible gap, we need to improve some of the methodology. That
has been the feedback. I would suggest that we have been progressing very
strongly on the methodology, not only across SG but also more broadly, for
effectively 12 to 13 months.[18]

3.19
When queried by the committee about why the information was not released
in 2016, and who made the decision to defer the release, Mr O'Halloran
explained:

I consulted with industry itself, through the Superannuation
Stewardship Committee, and got some feedback on the methodology. We then took
advice from that ATO expert panel. Ultimately, it went to the ATO executive,
which includes the Commissioner, around the release of gaps which were
identified as having a low level of confidence in a statistical sense if I can
use that term. Therefore, we have been tasked to do some more work and bring in
more expertise to improve that level to make sure it is reliable and also has
an increased level of confidence.[19]

3.20
When pressed to provide a more definitive timeline for when work would
be complete on the SG gap, the ATO stated in an answer to a question on notice
that 'we may be in a position to release the methodology by June
2017'.[20]

3.21
The committee also canvassed the issue of what the goal of generating
the gap analysis was, and queried whether it was for the purposes of
enforcement, compliance, risk assessment, or as an aggregate to drive resource
prioritisation with the ATO. Mr O'Halloran responded:

I would perhaps put a perspective that our intention in doing
any of these gaps is to track them over time, to give us a measure over time of
our effectiveness so that should see a reduction in the gap. Certainly from the
literature that I had read and from obviously some positional experience, very
few gaps actually give you case selection. What it does give you is a number, a
trend. It then identifies some industries where they might be some
characteristics that then allow you, if you like, where to look to invest and
make some of the resources and investments. So it becomes a guiding measure of
(1) our effectiveness over time in terms of that and (2) it certainly does, as
the methodology matures – and this has happened with the GST gap, whereby it is
the second and third iterations – got into the next level of trying to
particularise some breakdown within the overall gap trend and often at an
industry level, and certainly that would be our expectation over time.[21]

3.22
Evidence received from the Office of the Inspector-General of Taxation
indicated clear support for the collection of analysis on the SG gap. As Mr Ali
Noroozi, the Inspector-General of Taxation, stated during a public hearing:

...it is good for a government to have some level of
expectation in terms of both tax collected and super guarantee. It also makes the
revenue [agency] think about and plan ahead in terms of what they are going to
collect. If there is a gap indeed between what they had estimated and what ends
up being collected then they should have an explanation. By that stage it
should be clear to them why there was a difference between what they had
estimated and what they have actually collected.[22]

3.23
When asked whether the ATO had the capacity to make an estimation of the
level of non-compliance in relation to superannuation, Mr Noroozi indicated that
the capacity was available:

We have not done it before. They started doing it some time
ago with GST, for example. But there is no reason why not, as a formidable tax
administration – and they do well compared to revenue agencies of comparable
jurisdictions. We are not sure how they are attempting to measure the gap. But
one thing that may be a little unpopular is that, usually if you are measuring
tax gap, you need to do some level of random audits...

The tax office need to take a random sample and a sizeable
sample that can then be extrapolated to say, 'Based on this representative
sample we should estimate such and such.' I do not know how the tax office are
doing it, but I know that previously they have rejected our recommendations to
do any kind of random audits. I am not sure how they are doing it. They are
saying they are working on it.[23]

Committee view

3.24
The committee is deeply concerned by the ISA's analysis that indicates
that employers failed to pay an aggregate amount of $5.6 billion in SG
contributions in 2013-14. The committee is keenly aware that this amount
represents 2.76 million affected employees, with an average amount of $2025
lost per person in a single year.

3.25
The committee is surprised at the ATO's apparent reluctance to engage
with the issue of producing an SG gap, particularly as the matter has been
raised in numerous reviews dating back to 2010.

3.26
The committee is encouraged that all stakeholders seem to agree that non‑compliance
with SG obligations is a significant problem. Although there is no consensus on
the size of the SG gap, the committee is of the opinion that even a low
percentage of non-compliance is a serious issue. This is because the gap
represents real money owed to real employees, who are detrimentally impacted
upon by any instance of non-payment of SG. As discussed in chapter 4, these
non-payments in turn have flow-on impacts to government finances.

3.27
Even if, as the ATO posits, the actual SG gap is somewhat lower than the
ISA's estimate, the committee is of the view that a gap of this order of
magnitude is unacceptably high. As such, the committee feels that the ATO must
take urgent action to address SG non-compliance.

3.28
As a starting point, the committee strongly believes that having a
reliable SG gap figure, able to be tracked over time, would be an extremely
valuable tool in examining the rate of SG non-payment over time, analysing
which policies are effective, and ultimately minimising the problem.

3.29
The committee notes that the ATO indicated it would be in a position to
publish its methodology for the SG gap by June 2017. The committee further
notes that this date is three months after the working group is due to report
to the Minister for Revenue and Financial Services. The committee finds it
surprising that the ATO is prepared to criticise the methodology and estimated
SG gap of the ISA while not being in a position to produce an estimate of its
own. This is particularly the case given the fact that respectable authorities
such as the ANAO and the IGT have recommended the ATO produce such a figure.
Nevertheless, the committee encourages the ATO to commit to this release date
at the very latest.

3.30
Once the ATO has settled on its methodology, the committee expects the
ATO to publish a figure for the SG gap annually in order to allow the size of
the gap to be consistently tracked over time. The committee considers that this
would allow the effectiveness of current ATO SG compliance measures, as well as
the impacts of other initiatives such as Single Touch Payroll, to be properly assessed.

Recommendation 2

3.31
The committee recommends that the ATO prioritise its work on calculating
and publishing an accurate, reliable estimate of the SG gap. Additionally, the
committee recommends that the ATO commit to publishing the SG gap annually in
order for progress to be tracked over time.

3.32
Other mechanisms to address the current level of SG non-compliance are
addressed in later chapters of this report.